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Energy Sector Mutual Funds invest in companies operating in the energy and resources sector. these are open ended equity schemes suitable for long term investment options & highly volatile in the short term.
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Energy mutual funds are thematic mutual funds that invest across companies operating in the energy sector.
The materials space’s growth potential is related to the country’s economic growth. In comparison to other emerging markets, India’s per capita consumption in the materials and oil and gas (energy) sector is low. Housing, urbanisation, and infrastructure investment are long-term demand drivers for commodities. Owing to the increasing demand and the growth drivers, the growth prospects of the energy sector look bright.
Thematic energy funds build a portfolio by investing in firms whose economic operations centre around natural resource production, development, discovery, distribution, energy, mining, and so on.
The energy mutual funds invest at least 80% of their net assets in equity/equity-related instruments of companies in the energy and resources sectors in India.
These funds try to maintain a good balance between non-cyclical businesses and cyclical businesses. Non-cyclical businesses are the ones that are not affected during market turmoil. On the other hand, cyclical businesses are the ones that can outperform when certain themes take off. Chemicals and agricultural products such as fertilisers and pesticides are examples of non-cyclical businesses. Iron, steel, and cement are cyclical businesses.
The energy sector mutual funds are open-ended equity schemes and therefore are suitable long term investment options. Thus, these funds can be highly volatile in the short term. Moreover, only those investors who have an in-depth understanding of the energy sector and can track it closely should consider investing in energy funds. Since these are high-risk funds, a long-term investment horizon is necessary.
Following are the advantages of investing in energy mutual funds:
Consider investing in energy funds if you wish to seek exposure to the energy and its sub-sectors sector. Energy mutual funds are suitable for investors looking for tactical allocation. These funds offer good diversification to your investment portfolio. If you wish to invest across renewable energy, power, oil and gas, metals, etc., energy sector funds seem to be a good fit.
Energy mutual funds are equity schemes. Therefore, a long-term investment horizon is necessary to overcome market volatility. Energy thematic funds follow a particular theme and, hence, are highly volatile in the short term. Though the funds invest in high-quality stocks, the markets are volatile. And the portfolio will be highly sensitive to the movements. Thus, invest only if you are comfortable with the risk levels. Furthermore, since energy funds focus on one single theme, exposure of more than 10% to your portfolio is not advisable.
The energy sector is in focus, and the opportunities are bright; however, you should be careful while choosing a scheme to invest in. Following are some parameters that will help you select the best energy mutual fund for investment:
The Indian power sector is undergoing a tremendous transformation redefining the industry’s outlook. Sustained economic growth drives the electricity demand in India. The government’s focus on attaining ‘Power for all’ has accelerated capacity addition in the country. Increasing per-capita power consumption will provide the energy industry with a boost.
The government commits to increasing the usage of clean energy sources and is now working on a number of large-scale sustainable power projects. Also, it is extensively promoting green energy. Furthermore, renewable energy has the potential to provide a large number of jobs at all levels, particularly in rural areas.
The Indian government plans to create a ‘green city’ in each state that is driven by renewable energy. With solar rooftop systems on all of the city’s houses, solar parks on the outskirts, waste to energy facilities, and electric mobility-enabled public transportation systems.
India’s energy demand is expected to expand faster than that of all major economies. The country’s energy demand may be 1,516 Mtoe by 2035. By 2025, India wants to expand natural gas’s contribution to the country’s energy mix from 6% to 15%.
India’s very low per capita steel consumption, as well as the predicted increases in consumption due to expanded infrastructure construction and the thriving automobile and railroads sectors, provide enormous opportunities for expansion.
The Metals and Mining sector is expected to witness a major reform in the next few years. The new reforms and projects around Make in India Campaign, Rural Electrification and Smart Cities are going to be major drivers.
Additionally, the focus on building renewable energy projects under the National Electricity Policy and the rise in infrastructure development will also contribute to the sector’s growth.
Even though the energy theme has good future prospects, its growth may not be permanent. Markets move in cycles, and so do sectors and companies. Therefore, if you are an investor who understands the energy theme in-depth and is willing to undertake the volatility, you can consider investing in energy mutual funds.
Power is a fundamental component of a country’s infrastructure, economic growth and welfare. The availability and development of suitable infrastructure are critical for India’s economy to continue to thrive.
India’s power sector is one of the world’s most diverse sectors. The conventional power generation sources include coal, lignite, natural gas, oil, hydro, and nuclear power. On the other hand, the viable non-conventional options include wind, solar, and agricultural & domestic waste.
For generation from all sources (excluding atomic energy), transmission and distribution of electric energy, and Power Trading via the automated route, India allows 100% FDI in the power sector. 49% FDI is allowed in Power Exchanges that are registered under the automatic method.
India ranked 3rd in the renewable energy attractive index in 2021. As of 2020, India ranked 4th in renewable and solar power and fifth in wind power. India’s renewable energy sector is the 4th most attractive destination worldwide. Renewable energy will play an essential part as India attempts to fulfil its own energy demand by 2040.
According to the Central Electricity Authority (CEA), renewable energy generation will increase from 18% to 44% by 2029-30, while thermal generation will decrease from 78% to 52%. Under the automatic route, renewable energy production and distribution projects can get up to 100% FDI, according to the rules of The Electricity Act, 2003.
The oil and gas sector is India’s eighth core industry. Therefore, it significantly impacts how other important sections of the economy make decisions. India’s economic growth has a close correlation to its energy demand. Hence, the demand for oil and gas is expected to increase, making the industry attractive for investment.
After China and the United States, India is the world’s third-largest in energy and oil consumption. Furthermore, India is the largest exporter of petroleum products in Asia and the second-largest refiner.
By 2023-24, India plans to blend 20% ethanol in petrol products. Under the Ethanol Blended Petrol (EBP) Program, the government encourages the use of ethanol made from sugarcane and food grains. To meet the rising demand, the government has implemented a number of initiatives. It has authorized 100% FDI in numerous sectors, including natural gas, petroleum products, refineries, etc.
India is the world’s second-largest producer of crude steel as of October 2021. Furthermore, India has the world’s fifth-highest reserves of Iron Ore. Domestic availability of raw materials such as iron ore and low-cost labor has fuelled India’s steel industry’s rise. As a result, India’s steel industry has been a major contributor to the country’s manufacturing output.
The Indian steel sector employs modern and cutting-edge technology in its steel mills. It has always aimed to keep older facilities up to date and upgrade them to better energy efficiency levels. Also, the industry is undergoing the consolidation of players. As a result, players from other sectors are investing heavily. Moreover, the ongoing consolidation is a good opportunity for global players to enter the Indian markets.
India is the world’s second-largest coal producer and crude steel producer. In the steel and alumina industries, India has a competitive advantage in terms of production and conversion costs. Its strategic location offers a great potential for exports to develop as well as fast-growing Asian markets.
In 2019-20, India has 1,303 mines that reported mineral output (excluding atomic, fuel, and minor minerals) and produced 95 minerals: 4 fuel-related minerals, 10 metallic minerals, 23 non-metallic minerals, 3 atomic minerals, and 55 minor minerals. In 2040, coal is expected to be India’s greatest single source of electricity.
India has large reserves of Iron ore, Manganese Ore, Bauxite, Baryte, Mineral Salts, Chromium, and Rare Earth Metals.
100% FDI in the steel, mining, and coal & lignite via the automatic route.
India’s chemical sector is diverse, covering more than 80,000 commercial products. The products can be broadly classified into petrochemicals, agrochemicals, bulk chemicals, speciality chemicals, fertilizers, and polymers.
Many sectors, including textiles, paper, paints, soap & detergents, medicines, and agrochemicals, rely on India’s chemical industry for raw materials.
Following the US, Japan and China, India is the world’s fourth-largest producer of agrochemicals. And third-largest consumer of polymers.
By 2025, the market for chemicals and petrochemicals is expected to exceed USD 300 billion. India’s chemical sector has been de-licensed except for a few hazardous substances. The Chemicals and Petrochemicals sector will benefit from state-of-the-art infrastructure provided by upcoming Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs) and Plastic parks.
100% FDI is permitted for the chemical sector under the automated route, with an exception for hazardous chemicals.
Source: Make in India, IBEF, Invest India